Proposal 5 – Supermajority for Raising Taxes

Proposal 5 is the simplest of the initiatives to explain. It would require a supermajority (two-thirds) vote in both houses of the Legislature, or a majority vote in a November election, in order to raise state taxes.

While this might sound great to a taxpayer, the potential fallout of Proposal 5 being approved could have quite a negative effect on localities. Historically, when state revenue dips, the first thing cut is local assistance, said Eric Lupher, director of local affairs at the Citizens Research Council (CRC) of Michigan.

“We’ve seen this over the last decade as a state that’s had to deal with a recession,” he said. “The state needs to balance its budget, and at least half of its members aren’t willing to talk about raising new revenues. So it has kept its balanced budget by cutting back state revenue sharing, by freezing or cutting school aid, by cutting distributions to state universities.

“In one issue after another, where the state has played the role of collecting revenues and passing it on to others to provide services, it has said, ‘We need the money more than you do. You have the ability to levy your own taxes or collect tuition.’

“This sort of fiscal federalism can be very dangerous,” he said.

According to the CRC of Michigan, nine other states have the same requirement written into their constitutions, meaning that it can’t be overridden in an emergency situation. Two states, Wisconsin and Washington, have the requirement, but not in their constitutions. Because they are only state statutes, the rules can be overridden with a majority vote.

“The difference is that Michigan is so dependent on the economy, so vulnerable to economic swings, that it’s not as steady,” Lupher said.

“We have high points and low points. When they get low, they get very low. That’s generally when there’s a need to look at more revenues to get us through hard times.

“If that’s off the table, it’s going to be deeper cuts.”

If Proposal 5 passes can my taxes still go up?

Yes, but it just makes it harder to get through the Legislature. And a ballot initiative must wait until a November election.

“We’ve seen things like the gas tax and road funding, even when it requires a simple majority, there’s been an inability to get the requisite number of votes,” Lupher said. “To make it to two-thirds [in both houses] will make it even more difficult.”

What about local taxes?

The proposal does nothing to stop municipalities or counties from raising taxes to make up the deficits caused if the state guts their contributions again.

“So if the state cuts back distributions to local governments, it’s likely that while the taxpayers are protected from new state taxes, they might see a higher local tax burden, as the burden of paying for things is shifted down to local governments,” Lupher said.

In some cases, municipalities can raise property taxes. In others, they’d have to get creative.

“There’s a number of cities that have the authority to levy property taxes at rates higher than they do,” he said. “They could use that authority and raise taxes without going to the people. Right now, we have 22 cities that levy a local income tax.

“If their finances are made that much more difficult because of an issue like this, you’ll probably see more cities looking at that option. I think, arguably, cities [could be] going to the Legislature and saying, ‘Our finance system as a whole is broken; we need new tax authority — local sales taxes, local water bottle taxes, different ways of paying for local government.’”

What are the alternatives for the state?

The state can still raise fees, which is something that the other states with a supermajority requirement have done when they can’t get the votes to raise taxes.

Can they do reverse tax increases by cutting deductions and credits?

This issue would likely have to be dealt with in court. Cutting deductions would probably require a supermajority, Lupher said, but cutting tax credits might be a different matter.

“When you apply a tax credit, you’ve already gone through and calculated your tax base and applied a tax rate to it,” he said. “At that point, you’re saying you are eligible [a tax credit] and you’re just reducing the amount of tax liability. You haven’t changed the rate or base by creating a tax credit.

“Lawyers are going to argue both ways on that, but we can see where it will probably fall outside of this.”